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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) October 21, 2004
----------------
PC Connection, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware
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(State or Other Jurisdiction of Incorporation)
0-23827 02-0513618
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(Commission File Number) (IRS Employer Identification No.)
Rt. 101A, 730 Milford Road Merrimack, NH 03054
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(Address of Principal Executive Offices) (Zip Code)
(603) 683-2000
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(Registrant's Telephone Number, Including Area Code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
1
Item 2.02. Results of Operations and Financial Condition
On October 21, 2004, PC Connection, Inc. announced its financial results
for the quarter ended September 30, 2004. The full text of the press release
issued in connection with the announcement is furnished as Exhibit 99.1 to this
Current Report on Form 8-K.
The information in this Form 8-K (including Exhibit 99.1) shall not be
deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934
(the "Exchange Act") or otherwise subject to the liabilities of that section,
nor shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933 or the Exchange Act, except as expressly set forth by
specific reference in such a filing.
Item 9.01. Financial Statements and Exhibits
(c) Exhibits
The following exhibit relating to Item 2.02 shall be deemed to be
furnished, and not filed:
99.1 Press Release issued by PC Connection, Inc. on October
21, 2004.
2
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 21, 2004 REGISTRANT
PC CONNECTION, INC.
By:Patricia Gallup
-------------------------------------
Patricia Gallup
President and Chief Executive Officer
3
EXHIBIT INDEX
Exhibit Description
- ------- -----------
99.1 Press Release issued by PC Connection, Inc. on October 21, 2004.
4
Exhibit 99.1
PC Connection, Inc. Reports Third Quarter Results
22% Growth in Earnings Per Share
17% Net Sales Growth in Large Corporate Accounts
Chief Financial Officer Resigns
MERRIMACK, N.H.--(BUSINESS WIRE)--Oct. 21, 2004--PC Connection,
Inc. (NASDAQ:PCCC), a leading direct marketer of information
technology products and solutions, today announced results for the
quarter ended September 30, 2004. Net sales for the three months ended
September 30, 2004 increased by $1.9 million, or 0.5%, to $351.3
million from $349.4 million for the quarter ended September 30, 2003.
Net income for the quarter ended September 30, 2004, on a generally
accepted accounting principles (GAAP) basis, was $2.8 million, or $.11
per share, compared to $2.2 million, or $.09 per share, for the
quarter ended September 30, 2003.
The three-month period ended September 30, 2004 included special
charges that reduced earnings and earnings per share. Had these
charges not been recorded, pro forma net income for the quarter ended
September 30, 2004 would have been $3.9 million, or $.16 per share,
compared to $2.2 million, or $.09 per share, for the quarter ended
September 30, 2003, a 78% increase. The three-month period ended
September 30, 2003 did not include any special charges. A
reconciliation between net income on a GAAP basis and pro forma net
income is provided in a table immediately following the Consolidated
Income Statements.
Net sales for the nine months ended September 30, 2004 increased
by $59.7 million, or 6.3%, to $1,014.2 million from $954.5 million for
the corresponding period a year ago. Net income for the nine months
ended September 30, 2004, on a GAAP basis, was $6.2 million, or $.25
per share, compared to $5.2 million, or $.21 per share, for the
corresponding period a year ago. The nine-month periods ended
September 30, 2004 and 2003 included special charges that reduced
earnings and earnings per share. Had these charges not been recorded,
pro forma net income for the nine months ended September 30, 2004
would have been $8.5 million, or $.33 per share, compared to $5.4
million, or $.22 per share, for the comparable period a year ago. A
reconciliation between net income on a GAAP basis and pro forma net
income is provided in a table immediately following the Consolidated
Income Statements.
The Company also announced that Mark Gavin resigned as CFO
effective today, and a search for his replacement has been initiated.
On an interim basis, Jack Ferguson, Treasurer, will assume the duties
of CFO, and Stephen Baldridge, Vice President of Finance and Corporate
Controller, will oversee the Company's investor communication
activities. Patricia Gallup, Chairman and Chief Executive Officer,
said, "Jack and Steve are experienced members of our financial team,
and we expect a smooth transition of Mark's duties."
Consolidated gross margins, as a percentage of net sales, improved
year over year in the third quarter of 2004 by 90 basis points. Gross
profit margin as a percentage of net sales was 11.2% in the third
quarter of 2004, compared to 10.8% in the second quarter of 2004, and
10.3% in the third quarter of 2003. The Company has, for the third
quarter of 2004, revised its estimates relating to vendor
consideration in Issue No. 02-16 of the Emerging Issues Task Force
(EITF) and has reclassified additional advertising reimbursements from
vendors in excess of advertising costs incurred of $1.2 million from
selling, general, and administrative (SG&A) expenses to cost of goods
sold and inventory. Such excess advertising reimbursements had been
recorded as an offset to SG&A expenses, and this reclassification
resulted in an increase in gross margin of 0.2% for the third quarter
of 2004. As previously stated, the Company expects that its gross
profit margin as a percentage of net sales may vary by quarter based
upon vendor support programs, product mix, pricing strategies, market
conditions, and other factors.
Net sales for the small- and medium-sized business (SMB) segment
increased by 9.1% from the third quarter of 2003 to $195.9 million and
increased sequentially by 1.0% over the immediately preceding quarter.
Sales to government and education customers (Public Sector segment)
declined for the quarter by 24.8% over the third quarter of 2003 to
$77.9 million, but increased sequentially by 22.9% from the
immediately preceding quarter. Sales to the federal government
increased sequentially by 65.7% but declined year over year by 64.8%.
As announced in August, the Company was awarded a new GSA Contract
which allows its GovConnection subsidiary to more efficiently market
products and services to a wide variety of U.S. Government agencies.
Sales to state, local, and education customers grew sequentially this
quarter by 13.9% and year over year by 15.1%. Gross margins for both
the SMB and the Public Sector segments improved in the quarter by 1.0%
and 1.8%, respectively, over the year ago quarter. Sales to large
corporate accounts customers increased by 16.9% from the third quarter
of 2003 to $77.5 million but decreased sequentially by 0.6% from the
immediately preceding quarter.
Consolidated annualized sales productivity increased to $2.5
million per sales representative in the third quarter of 2004 from
$2.4 million per sales representative in the third quarter of 2003.
The total number of sales representatives increased to 571 at
September 30, 2004 from 570 at June 30, 2004 but decreased from 580 at
September 30, 2003.
Total SG&A expenses as a percentage of sales were 9.3% in the
third quarter of 2004 (including the EITF reclassification referred to
above, which increased this rate by 0.3%), compared to 9.2% in the
corresponding period a year ago. The Company expects that its SG&A
expenses as a percentage of net sales may vary by quarter depending on
changes in sales volume and the effect of any excess vendor
advertising reimbursements, as well as the levels of continuing
investments in key growth initiatives.
Notebook computer systems and PDAs continued to be the Company's
largest product category, accounting for 21.6% of net sales in the
third quarter of 2004 compared to 20.9% of net sales for the
corresponding period a year ago. Desktop and server computer systems
accounted for 13.9% of net sales in the third quarter of 2004,
compared to 14.2% for the corresponding 2003 period. The average
selling prices of computer systems decreased 0.9% in the third quarter
of 2004 compared to the corresponding period a year ago, but increased
4.0% compared to the second quarter of 2004.
Ms. Gallup concluded, "We are encouraged by the progress we have
made in improving our overall financial performance and operational
effectiveness. We believe that PC Connection is well positioned to
gain market share and that we have the strategies and resources needed
to deliver enhanced long-term shareholder value."
About PC Connection, Inc.
PC Connection, Inc., a Fortune 1000 company, operates three sales
subsidiaries, PC Connection Sales Corporation of Merrimack, NH,
GovConnection, Inc. of Rockville, MD, and MoreDirect, Inc. of Boca
Raton, FL. PC Connection Sales Corporation (1-800-800-5555) is a
rapid-response provider of information technology (IT) products and
solutions offering more than 100,000 brand-name products to businesses
through its staff of technically trained sales account managers and
catalog telesales representatives, catalogs, and publications, and its
web site at www.pcconnection.com. The subsidiary serves the
Apple/Macintosh community through its MacConnection division
(1-800-800-2222), which also publishes specialized catalogs and is
online at www.macconnection.com. GovConnection, Inc. (1-800-800-0019)
is a rapid-response provider of IT products and solutions to federal,
state, and local government agencies and educational institutions
through specialized account managers, catalogs, and publications, and
online at www.govconnection.com. MoreDirect, Inc. (www.moredirect.com)
provides corporate technology buyers with a comprehensive web-based
e-procurement solution and in-depth IT supply-chain expertise, serving
as a one-stop source by aggregating more than 300,000 products from
the inventories of leading IT wholesale distributors and
manufacturers. All three subsidiaries can deliver custom-configured
computer systems overnight.
A live webcast of PC Connection management's discussion of the
third quarter will be available on the Company's Web site at
www.pcconnection.com and on www.streetevents.com. The webcast will
begin today at 10:00 a.m. Eastern Time.
"Safe Harbor" Statement Under the Private Securities Litigation
Reform Act of 1995: This release contains forward-looking statements
that are subject to risks and uncertainties, including, but not
limited to, the impact of changes in market demand and the overall
level of economic activity, or in the level of business investment in
information technology products, competitive products and pricing,
product availability and market acceptance, new products, fluctuations
in operating results and other risks detailed under the caption
"Factors That May Affect Future Results and Financial Condition" in
the Company's Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission for the quarter ended June 30, 2004. More
specifically, the statements in this release concerning the Company's
outlook for the remainder of 2004 and the statements concerning the
Company's gross margin percentage and selling and administrative costs
and other statements of a non-historical basis (including statements
regarding implementing strategies for future growth, the ability of
the Company to improve sales productivity and increase its active
customers) are forward-looking statements that involve certain risks
and uncertainties. Such risks and uncertainties include the ability to
realize market demand for and competitive pricing pressures on the
products and services marketed by the Company, the continued
acceptance of the Company's distribution channel by vendors and
customers, continuation of key vendor and customer relationships and
support programs and the ability of the Company to hire and retain
qualified sales representatives and other essential personnel.
CONSOLIDATED SELECTED FINANCIAL HIGHLIGHTS
At or for the Three Months
Ended September 30,
2004 2003
(Dollars and shares in % of Net % of Net % Change
thousands, except Sales Sales
operating data,
price/earnings ratio
and per share data)
Operating Data:
Net sales growth 0.5% 2.5%
Diluted earnings per
share change 22.2 -
Gross profit margin 11.2 10.3
Operating margin 1.4 1.1
Return on equity (1) 7 5.7
Catalogs distributed 6,887,000 8,258,000 (16.6)%
Orders entered (2) 310,000 335,000 (7.5)
Average order size (2) $1,341 $1,303 2.9
Inventory turns (1) 16 19
Days sales outstanding 41 48
Product Mix:
Notebooks & PDAs 75,894 21.6 73,012 20.9% 4.0%
Desktop/Servers 48,858 13.9 49,686 14.2 (1.7)
Storage Devices 27,635 7.9 31,099 8.9 (11.1)
Software 41,958 11.9 37,581 10.7 11.7
Net/Com Products 25,703 7.3 27,834 8 (7.7)
Printers & Printer
Supplies 37,065 10.6 39,903 11.4 (7.1)
Video, Imaging & Sound 41,407 11.8 41,003 11.7 1
Memory & System
Enhancements 19,068 5.4 19,778 5.7 (3.6)
Accessories/Other 33,677 9.6 29,524 8.5 14.1
--------------------------------------
351,265 100.0% 349,420 100.0% 0.5
======================================
Net Sales of Enterprise Server and Networking Products
(included in the above Product Mix):
94,935 27.0% 95,730 27.0% (0.8)%
========== ==========
Stock Performance
Indicators:
Actual shares
outstanding 25,050 24,763
Total book value per
share $6.54 $6.30
Tangible book value per
share $4.63 $4.80
Closing price $6.87 $9.38
Market capitalization $172,094 $232,277
Trailing price/earnings
ratio (3) 25 28
(1) Annualized
(2) Does not reflect cancellations or returns
(3) Earnings is based on the last four quarters
SELECTED SEGMENT INFORMATION
For the Three Months
Ended September 30, 2004 2003
(Dollars in thousands) Net Gross Net Gross
Sales Margin(%) Sales Margin (%)
PC Connection Sales
Corporation (SMB) 195,943 12.2% 179,565 11.2%
GovConnection (Public
Sector) 77,864 9.8 103,596 8.0
MoreDirect (Large
Account) 77,458 10.2 66,259 11.3
--------------------------------------
Total 351,265 11.2% 349,420 10.3%
======================================
CONSOLIDATED INCOME STATEMENTS
Three Months Ended
September 30, 2004 2003
(Amounts in thousands, Amount % of Net Amount % of Net
except per share data) Sales Sales
Net sales 351,265 100.00% 349,420 100.00%
Cost of sales 311,859 88.78 313,494 89.72
--------------------------------------
Gross Profit 39,406 11.22 35,926 10.28
Selling, general and
administrative
expenses 32,765 9.33 32,059 9.17
Restructuring costs and
other special charges 1,800 .51 - -
--------------------------------------
Income From Operations 4,841 1.38 3,867 1.11
Interest expense (334) (.10) (270) (.08)
Other, net 35 .01 27 .01
Income tax provision (1,725) (.49) (1,444) (.42)
--------------------------------------
Net Income 2,817 .80% 2,180 .62%
======================================
Weighted average common shares
outstanding:
Basic 25,047 24,741
========== ==========
Diluted 25,215 25,322
========== ==========
Earnings per common
share:
Basic .11 .09
========== ==========
Diluted .11 .09
========== ==========
CONSOLIDATED INCOME STATEMENTS
Nine Months Ended
September 30, 2004 2003
(Amounts in thousands, Amount % of Net Amount % of Net
except per share data) Sales Sales
Net sales 1,014,235 100.00% 954,515 100.00%
Cost of sales 904,742 89.20 853,157 89.38
--------------------------------------
Gross Profit 109,493 10.80 101,358 10.62
Selling, general and
administrative
expenses 94,938 9.36 91,716 9.61
Restructuring costs and
other special charges 3,583 .36 397 0.04
--------------------------------------
Income From Operations 10,972 1.08 9,245 0.97
Interest expense (1,059) (.10) (849) (.09)
Other, net 136 .01 125 .01
Income tax provision (3,818 (.38) (3,363) (.35)
--------------------------------------
Net Income 6,231 .61% 5,158 54%
======================================
Weighted average common
shares outstanding:
Basic 25,018 24,686
========== ==========
Diluted 25,271 25,058
========== ==========
Earnings per common
share:
Basic .25 .21
========== ==========
Diluted .25 .21
========== ==========
A RECONCILIATION BETWEEN GAAP AND PRO FORMA NET INCOME
This information is being provided so as to allow for a comparison of
our operating results without special charges.
Three Months Ended Nine Months Ended
September 30, September 30,
(Amounts in thousands) 2004 2003 2004 2003
GAAP net income 2,817 2,180 6,231 5,158
Restructuring costs and
other special
charges (after tax):
Workforce reduction 5 - 361 240
GSA review and other 1,111 - 1,861 -
--------------------------------------
1,116 - 2,222 240
--------------------------------------
Pro forma net income 3,933 2,180 8,453 5,398
======================================
CONSOLIDATED BALANCE September 30, December 31,
SHEETS
(Amounts in thousands) 2004 2003
ASSETS
Current Assets:
Cash and cash
equivalents 7,367 2,977
Restricted cash (1) - 5,000
Accounts receivable,
net 123,503 144,337
Inventories -
merchandise 77,414 80,140
Deferred income taxes 3,391 1,732
Income taxes receivable 1,047 2,190
Prepaid expenses and
other current assets 3,629 3,649
--------- ---------
Total current assets 216,351 240,025
Property and equipment,
net 17,757 20,396
Goodwill, net 44,766 45,264
Other intangibles, net 3,129 3,393
Other assets 226 208
--------- ---------
Total assets 282,229 309,286
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current maturities of capital
lease obligation to affiliate 362 334
Note payable - bank - 5,614
Accounts payable 90,557 112,538
Accrued expenses and
other liabilities 18,336 13,063
Acquisition earn-out
obligation - 11,593
--------- ---------
Total current
liabilities 109,255 143,142
Capital lease obligation to
affiliate, less current
maturities 5,813 6,088
Deferred income taxes 3,370 2,867
--------- ---------
Total liabilities 118,438 152,097
--------- ---------
Stockholders' Equity:
Common stock 254 253
Additional paid-in
capital 76,798 76,428
Retained earnings 89,025 82,794
Treasury stock at cost (2,286) (2,286)
--------- ---------
Total stockholders'
equity 163,791 157,189
--------- ---------
Total liabilities and
stockholders' equity 282,229 309,286
========= =========
(1) Cash escrow established for the
MoreDirect, Inc. acquisition
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2004 (Amounts in
thousands)
Common Stock AdditionalRetained
--------------Paid In Earnings
Shares Amount Capital
Balance - December 31, 2003 25,342 253 76,428 82,794
Exercise of stock options, including
income tax benefits 33 1 165 -
Issuance of stock under employee
stock purchase plan 37 - 205 -
Net income - - - 6,231
--------------------------------
Balance - September 30, 2004 25,412 254 76,798 89,025
================================
Treasury Shares
---------------
Shares Amount Total
Balance - December 31, 2003 -362 -2,286 157,189
Exercise of stock options, including
income tax benefits - - 166
Issuance of stock under employee
stock purchase plan - - 205
Net income - - 6,231
------------------------
Balance - September 30, 2004 -362 -2,286 163,791
========================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Amounts in thousands) 2004 2003
Cash Flows from
Operating Activities:
Net income 6,231 5,158
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization 5,340 6,500
Deferred income taxes (1,156) (1,867)
Provision for doubtful
accounts 3,083 2,323
Loss (gain) on disposal
of fixed assets 9 (1)
Changes in assets and
liabilities:
Accounts receivable 17,751 (12,314)
Inventories 2,726 (19,995)
Prepaid expenses and
other current assets 1,163 250
Other non-current
assets (18) 147
Accounts payable (21,981) 32,810
Income tax benefits from exercise
of stock options 90 152
Accrued expenses and
other liabilities 5,273 2,123
--------- ---------
Net cash provided by
operating activities 18,511 15,286
--------- ---------
Cash Flows from
Investing Activities:
Purchases of property
and equipment (2,449) (1,907)
Proceeds from sale of property
and equipment 3 1
Payment of acquisition
earn-out obligation (11,095) (10,800)
Cash escrow distributed
for acquisition 5,000 5,000
--------- ---------
Net cash used for
investing activities (8,541) (7,706)
--------- ---------
Cash Flows from
Financing Activities:
Proceeds from short-
term borrowings 270,686 109,333
Repayment of short-term
borrowings (276,300) (109,333)
Repayment of capital lease
obligation to affiliate (247) (140)
Exercise of stock
options 76 290
Issuance of stock under employee
stock purchase plan 205 212
--------- ---------
Net cash (used for) provided by
financing activities (5,580) 362
--------- ---------
Increase in cash and
cash equivalents 4,390 7,942
Cash and cash equivalents,
beginning of period 2,977 1,797
--------- ---------
Cash and cash
equivalents, end of
period 7,367 9,739
========= =========
CONTACT: PC Connection, Inc.
Stephen C. Baldridge, 603-683-2502